While the European Union immediately drew up a list of U.S. products from bourbon to blue jeans to hit if Trump follows through on a plan to impose global duties on aluminum and steel, Canada has gone with equivocation.

“We’re making sure we take all discussions around trade with the United States in a measured way,” Finance Minister Bill Morneau said Tuesday.

“From our perspective the way to deal with a partner, to deal with our neighbour, is to be constructive. We’re going to continue to be strong allies of the United States, we’re going to continue to be neighbours, and we’re taking that as our frame to negotiate for a better outcome.”

From the outset, Prime Minister Justin Trudeau has taken a decidedly sunny approach to the unpredictable president, launching an outreach campaign to save NAFTA one encounter at a time with as many U.S. lawmakers, governors and administration officials as possible.

The Liberal government’s approach is largely backed across the political and business spectrum but pressure is building to abandon the measured tone.

“Trump has already treated China and Russia with more kid gloves than us. Why is that?” said John Weekes, Canada’s chief negotiator for the original NAFTA deal.

Weekes said Canada should draw up a long list of possible targets for retaliation, and publish it for public comment in a bid to ramp up U.S. concern about the pain of a trade war.

“I’d be the first to agree that retaliation is a mug’s game, but how do we help our allies in the United States make the case to change the course of policy?” he said.

Labour, too, is demanding more action.

Jerry Dias, president of Canadian private-sector union Unifor, said the government’s keep-calm approach had been the right one up until Trump’s planned steel tariffs. Canada should walk away from the NAFTA table if it is not exempted from the tariffs, he said, and put tariffs on U.S. steel exports in kind.

“There comes a time where you have to say ‘enough is enough’ because the U.S. does not want to deal, that is crystal clear,” he said.

A source familiar with Canadian government thinking said retaliatory measures were “a live conversation going on at this moment” and would be deployed if the tariffs are implemented. Trump has linked the tariffs with ongoing NAFTA negotiations.

Beyond the divide-and-conquer strategy of the outreach tour in the U.S., those close to the trade file say that dealing with Trump brings its own imperatives.

“We have to keep calm. It’s pointless talking in public about the ways you might retaliate until you have to act,” said a second source familiar with the issue who spoke on the condition of anonymity.

“As for people who stomp around and say ‘We will strike back’ — why would you do that? It just irritates the president.”

— Andrea Hopkins is Reuters’ bureau chief in Ottawa; additional reporting by Leah Schnurr in Ottawa and David Ljunggren in Mexico City.

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Finance Minister Bill Morneau’s 2018 budget proposes a couple of new limits on Canadian-controlled private corporations’ (CCPC) ability to benefit from a lower tax rate on passive investment income.

Morneau last July had proposed that savings — if held as passive investments within CCPCs — would be “taxed in a manner that is equivalent to savings held directly by individuals.”

Farm groups such as the Canadian Federation of Agriculture (CFA) objected at the time, describing passive investments as “vital” to farmers in managing year-over-year risks due to weather or market volatility.

Due to such concerns raised during public consultations last summer, Morneau stepped back from that proposal last fall.

As Tuesday’s budget noted, tax experts in last year’s consultations suggested the main reason for the use of private corporations as a tax planning tool was “the significant difference between personal tax rates and the low small business tax rate.”

Thus the new budget proposes that if a corporation earns over $50,000 of passive investment income in a given year, the amount of income eligible for the small business tax rate will be “gradually reduced.”

The small business deduction limit would be reduced by $5 for every $1 of investment income above the $50,000 threshold, cutting the business limit to zero at $150,000 of investment income.

The budget’s proposal marks “an important departure” from last July’s proposal, the government said, in that the budget plan doesn’t directly affect taxes on passive investment income. Also, no existing savings will face any additional tax on withdrawal.

Tuesday’s budget also proposes that CCPCs will no longer be able to get refunds of taxes paid on investment income while distributing dividends from income taxed at the general corporate rate. Refunds will continue to be available when investment income is paid out.

Until now, any taxable dividends a private corporation pays out could trigger a refund of taxes paid on investment income, regardless of where the dividend came from.

Both measures, the government said, will apply in taxation years that begin after 2018. The two measures, along with new rules on income sprinkling, are expected to raise $925 million per year for the government by 2022-23.

Tuesday’s budget documents emphasized that for a farm operating as a CCPC, investment income from the AgriInvest program — which includes matching government contributions — is not considered passive income and won’t be affected by the new rules.

The budget proposals on passive investments are targeted, the government said, to affect less than three per cent of CCPCs, or about 50,000 private corporations.

CFA president Ron Bonnett, in a separate release Tuesday, said the farm organization “is pleased that changes regarding passive investment incomes have been further clarified. However, more time is needed to review the legislation with more scrutiny.”

Budget expenses

The budget doesn’t include any specific additional measures for the federal agriculture department, holding its program expenses at $2.4 billion for 2018.

Noting “few mentions” of agriculture in Morneau’s budget speech and documents, Bonnett said Tuesday the CFA is “disappointed that the government hasn’t directly followed up on the vision from last year’s budget, which set ambitious targets to grow the industry for the benefit of all Canadians.”

However, Bonnett said, the budget’s “continued focus on research and innovation” is positive.

On the research front, the budget announced phase one of “an ambitious plan to renew federal laboratories,” offering up $2.8 billion over five years, starting in 2018–19, for constriction of “multi‐purpose, collaborative, federal science and technology facilities.”

Specifically, the government said, “rather than work in silos, this new approach to federal science and discovery will look to bring together federal scientists and science facilities across government including Agriculture and Agri-Food Canada, Natural Resources Canada, Fisheries and Oceans Canada, Environment and Climate Change Canada, the National Research Council and others.”

The budget also sets aside $100 million over five years for the Strategic Innovation Fund with a “particular focus on supporting projects that relate to (low Earth orbit, or LEO) satellites and next-generation rural broadband.”

LEO satellites, the government said, “can receive and transmit data with significantly improved response times” and help provide internet services across “challenging landscapes” at lower costs than fibre-optic lines.

Tuesday’s budget also commits $4.3 million over five years, starting in 2018–19, to “support the reopening” of penitentiary farms at the Joyceville and Collins Bay Institutions at Kingston, Ont.

The farms are to be run by Corcan, a rehabilitation programming agency of the Correctional Service of Canada (CSC).

The government in mid-2016 announced a feasibility study on reopening the Kingston farms, which the previous Conservative government had wound down in 2009. An advisory panel, including four eastern Ontario farmers, was set up last spring to further explore the idea of reopening farms at the sites.

The budget on Tuesday also pledged $194.1 million over five years toward a “robust compliance regime” to protect and enforce rights for temporary foreign workers (TFWs) in Canada, including unannounced inspections and “ongoing collection of labour market information related to open work permits.”

The budget further proposes $3.4 million over two years for a pilot program developing a “network of support organizations” for TFWs dealing with “potential abuse by their employers.” — AGCanada.com Network

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“I was very, very offended by all of this,” said Kurt Oelschlagel, of BDO Canada, who was part of a panel on the government changes at the CAFA event, held Thursday in Guelph and online.

Many of the slides in his presentation were made redundant, as Finance Minister Bill Morneau backtracked Thursday on yet another part of the changes.

The Liberal government’s proposed changes to small business corporations were initially aimed at high-income earners who have created personal corporations to manage their incomes to pay taxes at the lower corporate tax rate.

However, when accountants started examining the potential changes, they were much further reaching and complex than expected. They included changes to capital gains tax, tests that determine whether dividends distributed are to people who have contributed to the business and punitive tax rates on savings made within a corporation.

This week, Morneau has backtracked on two of those proposals, including capital gains. The government will now allow up to $50,000 per year to be saved in passive investments in corporations. He says that means that only five per cent of small business corporations will be affected by the higher passive investment return taxation levels.

At the Thursday event, the organizers played Morneau’s latest backtrack on the policy live, as he stood at an Erinsville, Ont. farm and talked about delaying the implementation of the capital gains changes.

That means most of the day’s presenters had to change their presentations after that announcement and the announcement on passive investment earlier in the week.

Justin To, director of policy and budget director for the minister of finance, was slated to speak to the meeting, but he backed out, citing the announcements by the government of changes to the tax proposals and especially the fact Morneau was making an announcement the same day.

“We live in a representative democracy and it looks like politics is coming into play,” said Stephen Sweeney, a Waterloo, Ont.-based partner at Miller Thomson LLP, a law firm that works with agriculture clients.

Sweeney said it will take 10 years to sort out all the implications of such significant tax changes and instead he suggested that time be taken to do thorough and well-thought-out tax reform, adding that the modern version of the Income Tax Act came into force in 1972.

“More complexity in the tax system means more creativity for tax advisors,” he says. “I’m not sure if it is good that tax advisors prosper by uncertainly felt by ordinary Canadians.”

Farmers were warned their accounting bills would rise due to the increased complexity and on-and-off changes.

One of the significant changes made by the government is in how it will measure who has meaningfully contributed to the business and therefore deserves remuneration in the form of dividends.

John Mill, a Guelph lawyer who works with farmers and farm advisors on tax reorganization, told the meeting that “family members who meaningfully contribute will not be impacted,” but that there will be little legal flexibility if family members are paid without contributing.

If there hasn’t been a meaningful contribution, then the money will be added to “split income” and taxed at a higher level.

He has concerns about how the amount that’s reasonable to be paid for work will be decided. Would it be possible for the revenue ministry to find someone who would do the work at minimum wage? Then anything above the hours worked at minimum wage rate could be taxed at a much higher rate.

The test for “reasonableness” will take in functions like assets contributed, risks assumed and prior compensation. Documenting hours could become necessary, which is a challenge when farmers live at their work and are on call all the time.

“The CRA is missing the point that farmers grow up in the family business. We train farmers in the family business and on family farms.

“Eight hundred million dollars per year (the total of the revenue increase of the new policy) is idiotic with the enormous societal cost of these idiotic policies,” Mill said.

The question has arisen relating to the payment of children of farmers who farm under a corporate structure.

Sweeney said the new “reasonableness” test will likely drive businesses from paying them through income sprinkling and to making them actual salaried employees of the farm.

Scott Ross, director of business risk management and farm policy with the Canadian Federation of Agriculture, said moving family members to employees, if they deserve to be paid, is one of the main goals of the government.

They want to drive activity away from dividend sprinkling and back to salaries, he says.
There was relief at the meeting that some of the most problematic provisions of the Liberal proposals were off the table, but also anger at the time wasted.

“How much non-billable time have we spent on this since it came out?” asked Oeschlagel, adding that many meetings were held with clients to prepare them for potential quick changes to their business organizations by the end of the year.

There remain a lot of unknowns — which will still mean a lot of work ahead for accountants, advisors and incorporated farms.

— John Greig is a field editor for Glacier FarmMedia based at Ailsa Craig, Ont. Follow him at @jgreig on Twitter.

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Finance Minister Bill Morneau on Thursday announced the federal government “will not be moving forward with measures that would limit access to the LCGE (lifetime capital gains exemption),” nor with “measures relating to the conversion of income into capital gains.”

Morneau’s announcement follows a related move Wednesday, in which the ministry announced plans for a new $50,000 threshold on passive investment income in a given tax year.

Both announcements marked a step back from proposals the government made this summer to limit the use of Canadian corporate income tax rates by “high-income individuals” as a way to gain a “personal tax advantage.”

During its consultations on those proposals, the government said Thursday, it heard from “many farmers and fishers,” among other business owners, that the measures “could result in several unintended consequences, such as in respect of taxation upon death and potential challenges with intergenerational transfers of businesses.”

The federal LCGE today offers a tax exemption for capital gains realized by an individual on the disposition of qualified small business shares, up to a lifetime limit of $835,716 in 2017, indexed to inflation.

Specifically for disposition of qualified farm or fishing property, the lifetime limit in respect of capital gains is $1 million, meaning a farmer can claim an LCGE of up to $1 million on disposition of eligible property, including on transfer of such property to a child.

The LCGE is applied on an individual basis, thus the amount can be doubled to $2 million if both a farmer and his or her spouse qualify for the exemption. Farmers, like other Canadians, are also entitled to a separate tax exemption from any gain on his or her principal residence.

On passive income, the government this summer had proposed measures by which savings held as passive investments within corporations would be “taxed in a manner that is equivalent to savings held directly by individuals” such as by salaried employees.

Groups such as the Canadian Federation of Agriculture (CFA) protested against that proposal, describing passive investments as “vital” for farmers in helping to manage year-over-year risks due to weather or market-related volatility.

Of the planned new $50,000 threshold, the government said Thursday, Canadian-controlled private corporations (CCPCs) that had taxable passive income above that threshold in 2015 represented just three per cent of the CCPC population, but earned more than 88 per cent of total taxable passive income.

Thus, the government said, the “vast majority of businesses will not be affected by the tax changes.” Corporations will see no tax increase on passive investment income below the $50,000 threshold.

Morneau also pledged Monday that measures proposed this summer relating to “income sprinkling” will be simplified, “with the aim of providing greater certainty for family members who contribute to a family business, including a family farm.”

The government also announced Monday it plans to cut the federal small business tax rate to 10 per cent effective Jan. 1, 2018, and to nine per cent in 2019.

“Farmers are pleased to see that Minister Morneau listened to concerns from CFA and other groups and, as a result, decided against plans to limit the lifetime capital gains exemption and options to convert income to capital gains,” CFA president Ron Bonnett said in a separate release Thursday.

“Both measures would have led to enormous complexity and added costs for intergenerational farm transfers and could’ve even encouraged farmers to sell their businesses to non-family members,” said Bonnett, a cattle producer from Bruce Mines, Ont.

Morneau’s other announcements earlier this week “also appear to be steps in the right direction,” the CFA said, adding it plans to study the final proposals once the related legislation is tabled in Parliament.

“We want to see farm and fishery families succeed,” Morneau said in the government’s release Thursday. “As we move forward with creating a fairer tax system for the middle class, we will work to protect family farms and fisheries, and the ability of all family-run business owners to pass down the results of their hard work to the next generation.” — AGCanada.com Network

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Prime Minister Justin Trudeau and Finance Minister Bill Morneau appeared side-by-side in Toronto’s far suburbs to announce the tax cut, highlighting their desire to get past what has become a major stumbling block as the two-year-old Liberal government heads into the second half of its mandate.

“Powerful interests have benefited a lot from the current system, and they will fight hard to maintain the status quo. We knew that going in. But nothing will stop us from building an economy that works for more Canadians,” Trudeau said in a sometimes combative news conference.

Earlier this month Morneau had promised the government would make changes to the July proposals that would address concerns expressed by many affected by the changes — including farmers concerned about the implications while saving for retirement, employing family members or selling their operations to the next generation.

“Our goal is not, and will not be, to change the ability to move a family business, a family farm, a fishing business from one generation to the next,” Morneau told reporters Sept. 28, after appearing before the House of Commons finance committee.

In trying to reset the tax debate, the government said Monday the small business tax will be lowered to 10 per cent effective Jan. 1, 2018, and to nine per cent in 2019.

In one example from a background document on the small business tax reductions, the government cited an example of a farm, summing up the example with the statement that “once the small business tax reductions are fully implemented, the business will save an additional $750 which could be used to help pay for new farm equipment.”

Trudeau on Monday shifted the focus away from those using the loopholes toward the tax code itself. “It’s not the people who are the problem, it’s the system,” he said.

At the same time, one of the most reviled parts of the tax reforms proposed in July — measures to limit access to the lifetime capital gains exemption, a move critics said would hurt the ability of families to pass their business on to their children — was abandoned.

When the owners of an incorporated farm sell their operation to family members they currently face a 25 per cent tax bill on the earnings — but under Ottawa’s proposed reforms it would have jumped to 46 per cent, according to several accountancy firms, including MNP.

The government indicated Monday it would still proceed with a crackdown on income-sprinkling — a tax strategy that sees business income transferred from a business owner to a spouse or child, who would be taxed at a lower rate.

In a statement Monday, however, Morneau and Bardish Chagger, the federal minister for small business, said the government now plans to “simplify” its proposal on income-sprinkling.

The “vast majority” of private corporations won’t be impacted by the proposed income-sprinkling measures, they said, including corporations with family members who “meaningfully contribute to the business.”

In July, Morneau proposed tax reforms meant to close loopholes for those that use private corporations to reduce the amount of tax they pay.

The three-pronged tax reform plan, which affected those who sprinkled income among family members or used passive investment income in order to be taxed at a lower rate, had sparked outrage among doctors, farmers and family businesses.

At its news conference Monday, the government was silent on the topic of passive investment income.

Farm organizations including the Canadian Federation of Agriculture and Canadian Cattlemen’s Association on Monday hailed the government’s announcements as a positive sign that their concerns have been heard.

The CCA said it “look(s) forward to reviewing the technical changes” relating to income-sprinkling, while the CFA said its members “look forward to more clarity” on the matter.

The CFA added its farmer members “remain apprehensive about other proposed tax measures, particularly on passive investments, which are vital for managing year-over-year risks due to weather or market-related volatility.”

The CFA said it has also noted concern with plans that would affect conversion of income into capital gains.

— Includes files from Gord Gilmour, Allan Dawson, AGCanada.com Network staff and Reuters.

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The federal government on Tuesday said the consultation, first announced in Finance Minister Bill Morneau’s March budget and due to end Wednesday, will instead run through to Monday, July 24.

When listed grains (wheat, oats, barley, rye, flax, canola, rapeseed) are delivered for payment at a licensed elevator, an elevator operator can issue either a cash purchase ticket or a deferred cash purchase ticket, payable in the year following the year in which the grain is delivered.

Under current tax law, a farmer who opts for a deferred cash purchase ticket is then able to include the amount of the ticket in taxable income in that following year.

The tax treatment of deferred cash purchase tickets “is a departure from the general rule with respect to taxpayers (including other farmers),” the government said in March.

In its announcement Tuesday, the government said it’s committed to “building a fair tax system” which “includes recognizing that, over time, changes in the economy have made a number of provisions in Canada’s tax statutes less relevant than when they were first introduced.”

For that reason, the government said Tuesday, it sought public comment on the “ongoing utility, and potential elimination” of the income tax deferral available for farmers’ eligible cash purchase tickets.

During the extended consultation period, the government said, stakeholders are invited to comment on the income tax deferral, “including any appropriate transitional period or rules.”

The “historical rationale” for the current tax treatment of deferred cash purchase tickets related to “international grain shipment agreements and the Canadian Wheat Board’s former position as the sole purchaser of listed grain in Manitoba, Saskatchewan and Alberta,” the government said in March.

With the single-desk Prairie grain marketing regime deregulated, “there is arguably no longer a clear policy rationale for maintaining the tax deferral accorded to deferred cash purchase tickets received as payment for listed grains.”

Groups such as Keystone Agricultural Producers and the Western Grain Elevators Association have rejected that argument and urged the government to keep the current rule.

“This is a tool that allows (farmers) to even their income one year to another, rather than have up-and-down spikes in income, which isn’t great for them,” WGEA executive director Wade Sobkowich told the Manitoba Co-operator last month.

“It’s easier to plan your life when you know what sort of income to expect. But farmers don’t have that luxury and the deferred cash payment is one way for them to even out the peaks and valleys of their income.” — AGCanada.com Network

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